On 26 September 2016, the Government assumed responsibility for the draft law stipulating the conversion of guarantees granted in 2014 and 2015 to NBM loans for Banca de Economii, Banca Sociala and Unibank into state debt(Government Decision No. 1085 from 26 September 2016 on assuming responsibility on the draft Law on the issuance of government bonds for execution by the Ministry of Finance of the payment obligations derived from state guarantees no. 807 of 17 November 2014 and no. 101 of 1 April 2015, (hereinafter the draft Law from 26 September 2016 on issuance state bonds in order to execute the Government guarantees) Official Monitor of the Republic of Moldova No. 329-336 from 27 September 2016).
This measure only concerns the enforcement of the legal provisions according to which, if the loan beneficiary is not able to reimburse the debt it shall be repaid from the state budget. Thus, the guarantees turn into state debt with the appropriate fiscal implications due to bankruptcy of the three banks. In addition to the law enforcement, the Government has appealed to this measure taking into account two other essential aspects. First of all, to avoid another negative image in case of not honoring the payment obligations to the NBM, which would undermine the negotiations with the IMF on a potential financial memorandum. Secondly, this measure has assured the protection of NBM’s independence. If the Government wouldn’t had ensured the conversion of guarantees, NBM reserve fund would had a debit balance, which, according to Law of the NBM would had obliged the state, represented by the Ministry of Finance to transfer the outstanding amount to the NBM.
However, we witness at least 6 issues related to the nature and manner how this decision was made:
- Insufficient transparency in the decision-making. The Parliament, Government, NBM and other relevant institutions did not organize any consultations or debates on the existing alternatives of overcoming the banking crisis. Generally, it is surprising that a decision with such pronounced budgetary effects (increase of the state budget by 37%, up to MDL 51 billion) was adopted in serious breach of the basic provisions on transparency in the decision-making. Presenting the draft law during meetings of parliamentary committees and placing it on Parliament's website is welcomed. However, the consultation process of such an important project should include the organization of public consultation, the assessment of its macroeconomic impact as well as the examination of international practice of other countries that had experienced similar banking crises in the recent years .
- The decision was taken avoiding the Parliament through responsibility assumed by the Government, at the expense of the basic democratic principle of division of state powers, control of the Executive by the Legislature and, respectively, with many doubts about its constitutionality (taking into account the pronounced fiscal implications). Doubts concerning the lawfulness of the last liabilities assumed by the Government are fueled by the fact that these are usually assumed in case of force majeure events that endanger the state, people’s lives or when some social relations must be immediately regulated – but none of these conditions were met.
- The decision was made on the background of weak progresses in addressing the aftermaths of the banking frauds. The process of returning the money stolen from the 3 banks is very slow and nontransparent, and the criminal investigations generated modest results, at least that is what can be seen.
- Conversion of guarantees issued by the Government into state bonds emphasize the effect of moral hazard created by the issuance of the guarantees in 2014 and 2015. We must realize that moral hazard has been created with the issuance of the guarantees in 2014 and 2015, and the Government's Decision of 26 September was the result of the provisions enforcement. The moral hazard is characteristic both, for individuals who tend to not examine the financial situation of banks knowing that the state will fully recover the deposits in case of bankruptcy, and for the bank shareholders and managers of bad faith. Thus, the potential banking fraudsters will be able to act without any concern and fear, being sure that these costs will be always covered by people. The tendency to assume unjustified risks is generated by the low accountability of both those involved in the banking activity, and those in positions of accountability in state institutions.
- The effective interest rate of 5% on bonds issued for a period of 25 years doesn’t have any economic grounds. According to the previously published Information Note this rate results from the need of covering losses caused by the inflation. But, the effect of the compound rate is not taken into account. Though, an effective rate of 5% is not enough to cover the losses from the annual inflation of 5% during 25 years. Introduction of this economically unjustified rate will add about MDL 11.5 billion to the total debt that is to be paid by citizens.
- Liability assumed by the Government is the effect of guarantees issued in 2014 and 2015 who defied basic principles of fairness. Even though a part of the debt will be covered on account of the assets recovered from the three banks, probably the largest part of it will have to be reimbursed from the taxpayers’ account. In this context, the inequity is determined at least by 2 factors: (i) losses caused by bank frauds are supported by taxpayers and not by responsible individuals / institutions who failed to prevent, reveal and / or elucidate these frauds; (ii) about half of the guarantees were issued for interbank deposits, so they had nothing in common with individuals who had deposits at the bankrupted 3 banks.
The position thereof is supported in the principle by the following members of the Task Force for Emergency Reforms (see the Annex for more details): Alexandru Zgardan, Alexei Buzu, Eugen Ghiletchi, Dumitru Vicol, Ion Gumene, Ion Guzun, Ion Preașca, Nadejda Hriptievschi, Sergiu Gaibu, Stas Madan, Vadim Gumene, Veaceslav Negruta (in alphabetical order).
This publication has been funded by the British Embassy in Chisinau, through the Good Governance Fund. The content of this publication is the sole responsibility of the author and does not necessarily reflect the views of the British Government.
 The draft Law on the issuance of government bonds for execution by the Ministry of Finance of the payment obligations derived from state guarantees no. 807 of 17 November 2014 and no. 101 of 1 April 2015.
 Government Decision No 938 of 13.11.2014 and Government Decision No 124 of 30.03.2015
 Art 19, (6) of Law on the National Bank of Moldova no.548-XIII of 21 July 1995
 Iceland offered one of the best examples of how to solve a banking crisis. This country refused to comply with the “too big to fail” rule and did not bail out banks, leaving aside all threats made by IMF and EU. The President organised a referendum to consult citizens on whether the Government should save banks and burden his own people for many years or not. Obviously, 95% of population voted against, which led to the collapse of banks. Early elections were organised and all those responsible of banking fraud were put in jail. For now, it seems to be unreal for our country, but the international practice at least must be studied to understand how the crisis from our country can be addressed.
 Draft Law No 257 of 08.06.2016